2 Basis of preparation and changes to accounting policies
2.1 Basis of preparation
The condensed consolidated interim accounts as at June 30, 2020 are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). These 2020 condensed consolidated interim accounts have been prepared in accordance with IAS 34 Interim Financial Reporting.
The accounting policies, presentation and methods of computation are consistent with those applied in the preparation of FMO’s consolidated financial statements for the year ended December 31, 2019. The consolidated interim accounts do not include all the information and disclosures that are required for the consolidated annual accounts, and should be read in conjunction with FMO’s consolidated annual accounts as at December 31, 2019.
2.2 Group accounting and consolidation
The company accounts of FMO and the company accounts of the subsidiaries Nuevo Banco Comercial Holding B.V., Asia Participations B.V., FMO Investment Management B.V., FMO Medu II Investment Trust Ltd., Equis DFI Feeder L.P. and Nedlinx B.V. are consolidated in these interim accounts.
The activities of Nuevo Banco Comercial Holding B.V., Asia Participations B.V., FMO Medu II Investment Trust Ltd. and Equis DFI Feeder L.P. consist of providing equity capital to companies in developing countries. FMO Investment Management B.V. carries out portfolio management activities for third party investment funds, which are invested in FMO’s transactions in emerging and developing markets. Nedlinx B.V. is incorporated to finance Dutch companies with activities in developing countries. FMO has a 63% stake in Equis DFI Feeder L.P. and all other subsidiaries are 100% owned by FMO.
2.3 Foreign currency translation
FMO uses the euro as the unit for presenting its annual accounts and interim reports. All amounts are denominated in thousands of euros unless stated otherwise. FMO uses the Euro as the functional currency.
2.4 Adoption of new standards, interpretations and amendments
The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation FMO’s annual consolidated financial statements for the year ended 31 December 2019, except for the adoption of new standards effective as of January 1, 2020. FMO has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The following standards, amendments to published standards and interpretations were adopted in the current year.
Amendments to the Conceptual Framework for Financial Reporting
On March 28, 2018 the IASB presented the revised Conceptual Framework for Financial Reporting. The Conceptual Framework is not a standard itself but can be used as general guidance for transactions/ events where specific IFRS standards are not available. The main improvements in the revised Conceptual Framework include the introduction of concepts for measurement bases and presentation & disclosure, guidance for recognition and derecognition of assets and liabilities. In addition definitions of an asset & liability and the criteria for recognition have been updated. These amendments are effective from January 1, 2020 and have no significant impact on FMO.
Amendment to IFRS 3 Business Combinations
The IASB issued amendments to the definition of a business in IFRS 3 Business Combinations in order to help entities determine whether an acquired set of activities and assets is a business or not. An entity shall apply the amendments to business combinations and asset acquisitions that occur on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. The amendments have had no impact to date as FMO has not entered into any business combinations as at the date of these condensed consolidated interim accounts. Any future business combinations will be assessed in light of the amendments.
Amendments to IAS 1 and IAS 8
In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 to align the definition of ‘material’ across the standards and to clarify certain aspects of the definition. The amendments are effective for annual periods beginning on or after January 1, 2020 and are applied prospectively. The amendments did not change the information FMO judges to be material to the primary users of its financial statements.
Interest Rate Benchmark Reform - Amendments to IFRS 9, IAS 39 and IFRS 7
In September 2019, the IASB issued amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. This concluded the first phase to respond to the effects of Interbank Offered Rates (IBOR) reform on financial reporting. The amendments provide temporary reliefs which enable hedge accounting to continue during the period of uncertainty before the replacement of an existing interest rate benchmark with an alternative nearly risk-free interest rate (an RFR). In May 2020, the IASB published an Exposure Draft in which amendments are proposed on IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures, IFRS 4 Insurance Contracts and IFRS 16 Leases. This Exposure Draft is the second phase on the effects of interest rate benchmark reform.
In June 2020, the IASB reviewed the feedback on the exposure draft and made tentative decisions regarding all proposed amendments. The IASB expects to issue final amendments in Q3 2020.
In January 2019, FMO started the IBOR project with an expected end date of December 2021. FMO is preparing for discount curve changes in EUR and USD derivatives (cleared interest rate swaps) at various stages in 2020. Next to derivatives, impact is expected on the valuations of other financial assets and liabilities (mainly Loans to private sector and Debentures and Notes). The impact on financial reporting is primarily expected in the areas of hedge accounting of cleared and non-cleared derivatives and the choice between cash compensation or compensating swaps. The financial impact is not expected to be material.
2.5 Standards issued but not yet effective
Other significant standards issued, but not yet endorsed by the European Union and not yet effective up to the date of issuance of FMO’s Interim Report 2020, are listed below.
IFRS 17 Insurance Contracts
In May 2017, the IASB issued IFRS 17, a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, IFRS 17 will replace IFRS 4 Insurance Contracts. In June 2020 IFRS 17 was amended whereby the effective date was extended to financial periods beginning on or after January 1, 2023. This standard does not have an impact on FMO.
Amendments to IAS 1 - Classification of Liabilities as Current or Non-Current
These amendments affect the presentation of liabilities in the statement of financial position. They clarify the considerations that determine whether a liability should be classified as current or non-current. The amendments are not expected to have a significant impact on how FMO classifies liabilities in the statement of financial position. The amendments are effective from 1 January 2023 and are applied retrospectively.
Amendments to IFRS 3 - Reference to the Conceptual Framework
The amendments to IFRS 3 update the reference to the 2018 Conceptual Framework, as well as making reference to IAS 37 when determining whether a present obligation exists as a part of an acquisition. In addition, IFRS 3 now explicitly states contingent assets acquired in a business combination are not recognised. The amendments are effective for business combinations entered into on or after 1 January 2022. They are not expected to have a significant impact on FMO's treatment of business combinations.
Amendments to IAS 16 - Property, Plant and Equipment - Proceeds before Intended Use
The amendments prohibit deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced before that asset is available for use. The amendments are effective for annual periods beginning on or after 1 January 2022 and are applied retrospectively. Given the nature of FMO's property, plant and equipment, this amendment is not expected to have a significant impact on the accounting treatment of these items.
Amendments to IAS 37 - Onerous Contracts
The amendments provide clarity on which costs an entity considers in assessing whether a contract is onerous. The amendments are effective for annual periods beginning on or after 1 January 2022 and to contracts for which the entity has not yet fulfilled all its obligations at the beginning of the annual reporting period in which the entity first applies the amendments. There are currently no contracts which FMO believes will be significantly impacted by the amendments.
Annual Improvements 2018-2020
Subsidiary as a First-Time Adopter (IFRS 1)
IFRS 1 allows subsidiaries that become a first-time adopter later than its parent to measure its assets and liabilities at the carrying amounts that would be included in the parent’s consolidated financial statements. The amendment extends this relief to the cumulative translation differences for foreign operations. The amendment is effective for annual periods beginning on or after 1 January 2022. The amendment will not have an impact on the consolidated financial statements of FMO.
Fees in the ‘10 per cent’ Test for Derecognition of Financial Liabilities (IFRS 9)
When considering the derecognition of a financial liability, IFRS 9 indicates that the terms of the instrument are deemed to be substantially different (and therefore qualify for derecognition) if the discounted present value of the remaining cash flows under the new terms are at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability (‘10 per cent’ test). The amendment clarifies which fees an entity should include when applying the ‘10 per cent’ test. The amendment is effective for annual periods beginning on or after 1 January 2022 and is not expected to have a significant impact on the accounting treatment for derecognition of financial liabilities.
Lease Incentives (IFRS 16)
The amendment removes an illustrative example on the reimbursement of leasehold improvements and has no impact on the accounting treatment for leases.
Amendment to IFRS 16 - COVID-19 Related Rent Concessions
The amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the COVID-19 pandemic are lease modifications and allows lessees to account for such rent concessions as if they were not lease modifications. FMO is not expecting to make use of any rent concessions.
2.6 Estimates and assumptions
In preparing the condensed consolidated interim accounts in conformity with IAS 34, management is required to make estimates and assumptions affected reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. The same methods for making estimates and assumptions have been followed in the condensed consolidated interim accounts as were applied in the preparation of FMO’s consolidated annual accounts as at December 31, 2019.
A management overlay was introduced to reflect the impact of significant increases in credit risk on certain exposures of the loan portfolio. The overlay is derived by limiting the maximum number of notches between a client's rating and its respective country rating, also taking into account the underlying sector. In addition, the macro-economic scenarios applied in the estimation of expected credit losses were updated to reflect the latest IMF GDP forecasts, considering the economic impact of the COVID-19 pandemic. For equity investments, additional inputs of MSCI indexes have been included in the valuation of these investments that incorporate the impact of the pandemic. The details and impact of the above items are presented in the 'Risk Developments' section, in the 'Credit Risk and Equity Investment Risk' sub-sections respectively.
2.7 Segment Reporting
The operating segments are reported in a manner consistent with internal reporting to FMO’s chief operating decision maker. The chief operating decision maker who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Management Board. FMO presents its operating segments based on servicing unit. Reference is made to Note Segment Information for more details on operating segments.